Trapped?

Posted
on April 18, 2011, 9:46 pm

In his most recent column, “Middle-Class Tax Trap,” Ross Douthat laments what he sees as the unconscionable tax burden that a new CBO report projects for middle-class families in 2035. But, Douthat misses the most important part of the CBO projection: even after the big tax increase, CBO projects that middle-class families will be much better off in 2035 than they are today.

Here’s Douthat:

“Today … a family of four making the median income –$94,900– pays 15 percent in federal [income and payroll] taxes. By 2035, under the C.B.O. projection, payroll and income taxes would claim 25 percent of that family’s paycheck. … Federal tax revenue, which has averaged 18 percent of G.D.P. since World War II, would hit 23 percent by the 2030s and climb even higher after that.”

But, let’s look at the CBO report (pdf) he cites. In that document (see Table 4-4), the median income for a “married couple with two children filing a joint return” in 2010 was $94,900. According to CBO projections, by 2035, the median income for the same family type –also in 2010 dollars– will be $145,200!

Even after paying the higher tax rates (most of which is going to pay for higher health-care costs), the family of the future will be substantially better off in real terms than the family that the Republicans and the President are asking to make sacrifices today.

Here’s the math. According to the CBO, today’s “typical” family earns $94,900 and pays a combined federal income and payroll tax rate of 15 percent, leaving an after-federal-tax income of $80,665. In 2035, the higher 25 percent tax rate applied to the higher $145,200 income, still leaves $108,900 in after-federal-tax income. That is a projected 35 percent higher after-federal-tax income.

This is a problem in nearly every discussion of intergenerational equity. Assuming that productivity continues to grow –as it has for centuries under capitalism– future generations will be richer than we are today. If health care, pensions, and other crucial social services will cost more in the future, future generations will also be much better situated to pay than we generally imagine today.

There are two exceptions to this general principle. The first is when costs are projected to grow faster than future incomes for an indefinite period. This is exactly the problem with health-care costs. CBO and every other current set of projections show health-care costs increasing faster than income. If that holds indefinitely, all of our future income will eventually be consumed by health care. That obviously won’t happen. The only question is when and how we will ultimately bring costs under control.

The second exception has to do with natural resources, most importantly, the climate. The biggest burden we can pass on to our otherwise much richer children and grandchildren is an irreparably damaged global climate.

So if Douthat wants to help the families of the future, he should focus on rising health-care costs (public and private) and climate change, not the tax burden.

2 Comments

Great post. Complain about income inequality, and right-leaning folks claim that relative shares don’t matter, absolute sizes of shares do. I guess it’s not surprising that they’d conveniently forget this lesson when complaining about the share of income consumed by taxes.